New Law Helps Military Servicemembers Avoid Financial Exploitation

by Neil Bartlett

A recent law shields military servicemembers and their families from financial predators. The Military Personnel Financial Services Protection Act guarantees stronger consumer protections.

"While certain financial companies have been wrongly taking advantage of our military troops, this law effectively will end these practices and ensures that financial regulators have greater power they need to prevent abusive sales and ban questionable financial products in the future," says past chairman of the House Financial Services Committee, former Rep. Michael Oxley (R., Ohio).

Several kinds of protection

The Act protects military personnel in several ways. "Each provision is important," says Arty Arteaga, president and CEO of the Defense Credit Union Council, Washington, D.C. Here are the main ways it will benefit servicemembers.

• It bans the sale of periodic payment plans. Also known as "contractual plans" or "systematic investment plans," they've all but disappeared from civilian markets because they carry astronomically high fees and sales commissions. Typical is a 50% first-year sales commission against the first year of contributions by a servicemember. A typical plan requires monthly investments over a period of 10 to 25 years. According to the Securities and Exchange Commission, an investor is nearly certain to lose money if he or she withdraws investments or terminates a plan in the first few years, because of the upfront sales charges. "You would need extraordinary investment returns to recoup those fees and begin to realize a profit," according to an SEC document.

  SEC research also shows that three of the largest four firms that sold periodic payment plans exclusively to the military community make up to 95% of the plans sold. As of October 2005, eight financial firms registered with the SEC sponsored those plans. Their combined assets of $12 billion was less than 0.2% of all assets currently invested in nonmoney market mutual funds. "Nonetheless, many members of the military have continued to invest in these plans," according to Lori Richards, the SEC's Director of Office of Compliance Inspections and Examinations.

• It declares that any state law, regulation, or order regarding insurance applies to insurance activities conducted on military installations.

• It requires disclosures before private life insurance is sold to military personnel. Servicemembers are eligible for Servicemembers' Group Life Insurance (SGLI), a program of low-cost group life insurance with coverage to $400,000. "The provision's intent is to ensure that private insurance agents inform the servicemember of their SGLI coverage, so the servicemember can determine whether there's a need for more coverage than SGLI provides," says Arteaga.

• It requires military personnel to be informed about life insurance available through the federal government--before the sale of private life insurance. "SGLI is reliable, safe, and very affordable," says Kathleen Moakler, deputy director of the government relations department at the National Military Family Association Inc. in Alexandria, Va. "Servicemembers are currently informed about it in basic training and over 99% sign up for it, but people don't always understand their coverage when you tell them the first time," says Moakler. "A typical servicemember has a lot of other concerns on his or her mind and, when approached by a salesperson, may not remember that they have SGLI coverage."

• It establishes a list of barred brokers and agents that's available to installation commanders and state and federal financial regulators; "Once you're on the blacklist, it separates you from the rest of the industry, and you end up closing your doors," says Arteaga.

• It provides investors with online access to information, including disciplinary actions, regarding broker-dealers. "This is good news," Arteaga says.

• It urges state insurance regulators to work with the Department of Defense (DoD) to develop life insurance product standards and disclosures. It also asks the National Association of Insurance Commissioners (NAIC) to develop ways of improving the quality of life insurance products sold on military installations, and to implement appropriate standards to protect military personnel from dishonest and predatory sales practices. In September 2006 the NAIC signed a partnership with the deputy undersecretary of Defense.

Troops are vulnerable

According to experts, there are several reasons why military servicemembers need protection from financial exploiters.

For one thing, they're often young and inexperienced in handling their money. A June 2005 survey conducted for the NASD found that only 29% of military personnel who currently invest received a passing grade on a quiz about basic financial knowledge, while 58% said it was very important to them to become smarter about saving and investing.

Second is the nature of their employment. "When someone comes to a servicemember and says, 'I want to sell you insurance,' the servicemember desires to protect their family," says Moakler. "And they're easily preyed on because they have a steady income."

Unscrupulous financial quacks also know the military's values and lifestyle means servicemembers will make every effort to pay their bills. Failure can result in a black mark. "Military personnel fall under a different set of rules, called the Uniform Code of Military Justice," says Arteaga. "If the servicemember doesn't pay his debt on time, it may jeopardize his security clearance and cause nonjudicial punishment to be administered under the UCMJ (Uniform Code of Military Justice)." That can mean a fine and a letter in the servicemember's personnel file, and it can even affect whether he or she is deployed overseas.

More financial education is critical--not just for military servicemembers, but for all young people. "Youngsters coming on active duty are nothing more than a cross-section of society," says Arteaga.

Life or death

Discovering you've been ripped off financially can have a deleterious effect. "When you have a servicemember distracted in a combat situation because of financial problems at home, you have an individual who may be putting his life in danger," says Moakler, herself part of a military family for 33 years. "It's serious."

Published June 18, 2007

Printed Monday, October 6, 2008

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